The name might benefit from some tweaks but, if implemented well and honestly, unlimited vacation can be the secret sauce to great success and sustainable culture. Before you take the leap, consider the risks and rewards.
The Good
Unlimited Vacation is an Excellent Recruiting Tool. For potential employees – especially those in senior positions – unlimited vacation policies reduce switching costs. Incoming employees no longer have to fear losing significant seniority-based PTO benefits gained over many years with a single employer. All new hires may realize a valuable windfall compared to other offers with traditional seniority-based PTO, providing a powerful inducement.
Bonus for employers: Unlimited vacation policies are still rare enough that the uninitiated may feel they’ve found the pot of gold at the end of the employment rainbow, creating a halo effect for the employer.
Unlimited Vacation Reduces Expenses. GAAP and FASB require employers to accrue for “earned but not taken” vacation time, which appears as an expense on financial statements in the current fiscal year. Implementing an unlimited vacation policy can wipe out that accrual, allowing the company to reduce expenses in the current fiscal year and avoid carrying the expense in future years. For a company with many employees or tight finances, eliminating the accrual balance can represent a significant one-time windfall.
As an added expense-saving bonus, unlimited vacation policies can eliminate hours of HR and employee time spent tracking and accounting for used and unused PTO.
Unlimited Vacation Eliminates a Cash Outflow Spike at Separation. Many states require employers to pay out all unused vacation time on the next regular check following separation, whether voluntary or not. For simplicity of administration, most employers will follow the same policy nation-wide. The cash outflow can be significant, especially for smaller companies. With typical vacation rollover policies, an employee might have nearly two years’ worth of accrued but not taken vacation time.
Unlimited vacation policies will typically lump all PTO into one plan which, because it is unlimited, eliminates accrual of time. Nothing accrued, nothing paid.
The Bad
Unlimited Vacation Presents FMLA Complications. If vacation is unlimited, then when does FMLA leave begin? What is the triggering event? A shrewd employee, anticipating an extended leave and fearing termination, might delay recognizing FMLA events and remain “on vacation” as long as possible before claiming the 12-week FMLA leave benefit. In such cases, the company could find itself short-staffed for an extended period and then be required to reinstate the long-absent employee upon their return.
Under an unlimited vacation policy, an employee also might successfully argue (legally) that they should be paid during their FMLA absence, as their vacation time is unlimited. For further reading, look here.
Unlimited Vacation Relies on Missing Measures. Switching to an unlimited vacation policy requires a change from measuring time to measuring completion. The primary focus is not whether an employee shows up and works eight hours a day, but whether they get the job done. The challenge with changing what you measure is that you must actually have a method for measuring. What if the job is never done? What if the supply of work is unending? What if certain processes take longer than others? Without objective and clearly defined measures and standards, neither employee nor employer can prove adequate performance.
Unlimited Vacation Eliminates Employee Safety Nets at Termination. This is the other side of the “No Cash Outflow…” coin described in the “Good” category above. Employees often hold accrued but unused vacation time as a built-in safety net in case they are fired, laid off, or fall ill for an extended period. Companies may highlight the extra payment upon termination, both to soften the blow and to ease their conscience. Under unlimited policies, there is no payout due. A terminated employee may well find themselves out of work with zero income, effective immediately upon termination.
The Ugly
Unlimited Vacation can be a Legal Quagmire. Confusion and HR, like ambiguity and contracts, do not make for pleasant court appearances. Poorly defined vacation policies – whether unlimited or not – give rise to issues around FMLA, ADA, wrongful termination, and more. The necessity of clear language and objective measurements may create complexities and vulnerabilities that rival independent contractor tests.
For more details on the dangers of contractual confusion, see the definition of contra proferentum, or for a bit more wit see this article from the American Bar Association.
Unlimited Vacation Requires Objective Metric Development. Effective unlimited vacation policy administration and protection from wrongful termination lawsuits requires that every position have specific, unambiguous, codified performance requirements. Job descriptions should be complete and concise, and should regularly be evaluated and adjusted as job duties and performance requirements evolve.
All this documentation is a very good idea to begin with, but the smaller the company the less likely it is that such documentation exists. Good, regularly updated documentation is like insurance: expensive when you don’t need it, cheap when you do. According to one 2015 report based on 400+ closed cases, an average employee lawsuit will cost a company $125,000 to defend. For half that much, you can hire a well-qualified HR professional to make certain your corporate butt doesn’t end up in a court-imposed sling.
Before you discount the idea of being sued, remember that a disgruntled employee can file a complaint with the DOL for free! Simply responding to a DOL complaint will cost thousands in legal advice and lost time (I know whence I speak).
Unlimited Vacation can Hurt Morale. Senior employees may feel disenfranchised and devalued when egalitarian policies supplant seniority-based perks. Gosh that sounds impressive. Let’s simplify: people who work for years to finally reach the maximum vacation-time rung are going to be hacked off and scared when you remove one of the last perks of seniority.
Implementation Suggestions
To paraphrase Pope, fools rush in where HR fears to tread. Do your homework before implementing or accepting an unlimited vacation plan, especially:
- Involve HR and Legal. Some (U.S.) States have minimums for sick time and laws prohibiting “use it or lose it” policies for various types of PTO. Some of these statutes may, however, be satisfied by lumping all PTO together in an “unlimited” policy, and/or by specifying maximum “bucket” sizes for PTO accruals. Your HR and Legal advisors should review and address your exposure and risks before you make the big announcement.
- Consider a different name. Let’s face it: “unlimited” is a lie. Of course there are limits, they just aren’t specified and standardized. Such obvious smoke-screens are a cheap party trick. Do yourself a favor and pick a different name. How about “open-ended,” “flexible,” or “variable”?
- Define, define, define. Overdo it on documentation. Provide examples, case studies, and suggestions for use. Make sure employer and employee alike know what to expect.
Lastly: It won’t work without mutual trust and respect.
The onus here is mostly on the employer. Open, honest, transparent communication is vital to gaining and holding employee trust. If, as an employer, you hope to implement such a policy to gain an advantage over your employees or to swindle them out of previous promises, it won’t work. Dishonest management hurts morale, productivity, and your reputation.
It should go without saying but in today’s world, it bears repeating: Be honest. Think win-win. Look out for your employees, and they will look out for you.